Despite promises to cut costs, the 2011 federal budget reintroduced yesterday by Finance Minister Jim Flaherty will still swamp Ottawa with red ink for several years. More alarmingly, the federal government will only balance the books mid-decade if its optimistic revenue projections prove accurate.
This approach is far too timid. The International Monetary Fund (IMF) recently reviewed the finances of several advanced economies, and concluded that Canada must reduce the share of GDP devoted to government expenditures from 43 to 38 percent over the next decade. Failure to meet this target will either mean higher taxes, or the expansion of a dangerous debt load.
Achieving this objective will be especially difficult, considering the pressure our ageing population will put on health care costs. Given demographic realities, Canadian governments face budget pressures comparable to those of the early 1990s, when aggressive austerity measures were enacted.
To eliminate the deficit and restore Canada’s fiscal health, the government needs to take stronger action. A good place to start would be to slow the unsustainable growth of the government wage bill, the salaries and benefits taxpayers pay public employees.
A recent analysis by the C.D. Howe Institute shows the total wage bill for federal civilian employment grew at an annual rate of almost seven percent between fiscal years 1999/2000 and 2009/2010. In dollar terms, the wage bill increased by 90 percent, from $12.8 billion to $24.4 billion, while the economy grew by only a little more than 55 percent during the same decade.
This trend has two causes. The first is a significant increase in the number of public servants. The federal government’s civilian workforce grew by 35 percent between 1999 and 2009, while the Canadian population increased by only 11 percent. Jobs in the for-profit sector of the economy increased by 14 percent during this time period.
The second major contributor was a steady increase in compensation costs per employee. In February, the Frontier Centre for Public Policy released a study showing average wages for federal public administration workers increased faster than the average wage for any other major category of worker, growing 59 percent between 1998 and 2009 according to Statistics Canada. By comparison, average wages across the economy increased only 30 percent. The aforementioned CD Howe report notes that total compensation per civilian employee in the federal government reached $94, 000 in 2009/2010, nearly double the average of $47,500 in the private economy.
Canada is fortunate to have an outstanding federal public service. Nevertheless, during a fiscal crunch, all elements of government expenditures need to be examined, and unsustainable trends addressed. Acknowledging that the country can’t afford to grow government wages at a galloping pace does not minimize the contribution of public servants, but recognizes fiscal reality.
Yesterday’s budget offers an insufficient response to this challenge. Canada needs an aggressive strategy to fix our public finances, starting with a commitment to curb runaway spending on government wages.